It’s a paradox: Some family owner groups in the third, fourth, fifth generation, and beyond, have sophisticated governance structures and a history of embracing world-class family business advisory help. They may have even been awarded global recognition for “best practices” in governance. But a growing sense of dissatisfaction has crept in among the family owners. Decisions don’t feel representative of the family’s interests. Something just doesn’t feel “right,” as if the energy holding the system together is fading. What’s going on?

“Empty structures syndrome” is a term that describes a situation when family owners have come to feel little authority over, or psychological ownership of, their family business governance. This malaise may occur in the family, board, management, and/or owner domains, and can go in one of two directions: increased tension and overt conflict, or apathy and owner disengagement. Either situation, if left unaddressed, can ultimately lead to a splintering of the stakeholder group.

What does “empty structures syndrome” look like?

Four main inconsistencies typically signify empty structures syndrome.

• First, there are well-crafted mission, vision, purpose and/or values statements. There may even be detailed rules and decision structures, but concern or dissent is growing in the family owner group about the family’s “common purpose.” Mistrust and suspicion about other family members’ values is on the rise.
• Second, there may be sophisticated structures and procedures for owner development and meeting planning, but there is decreasing interest to serve on boards or participate in meetings. Those who continue to serve and attend feel burdened and disappointed at others “lack of commitment.” Those who do not serve, and sometimes even those who do, disengage from the governance process.
• Third, formal decision groups exist to represent owners’ interests and enforce rules and guidelines, but these groups decline to act when members break the rules, in small or large ways.
• And fourth, communication guidelines and forums for discussion exist, but regular “leaks” occur. People avoid addressing the real issues in the forums designed for open discussion. Instead they share complaints with like-minded individuals, telephone-game style.

An example of empty structures syndrome.

Consider one family (all identifying characteristics have been changed): The first-generation patriarch established an investment management company in the late 1970s. Through tax planning and gifting, he transferred ownership to his four children in trust in the late 1990s. As part of that process, he established a board to make investment decisions. But in practice, he retained all decision-making power.

Over the years, he approved two investments that benefitted his two eldest children without consulting their siblings or the board. No one challenged the patriarch. Later, when the patriarch’s health began to fail, he withdrew from the board, leaving the four siblings and an independent outsider to manage investments. The board met regularly, but only to review a list of investments suggested by the independent.

Fast forward to today: now two years after the patriarch passed, one of the younger siblings proposed an investment that would unequally benefit himself and his sister, to the detriment of the two elder siblings. The investment also violated one of the unwritten rules established by the patriarch. The wider family saw this proposal as “payback” for the earlier decisions that favored the older siblings. Despite many informal objections, the board failed to block the investment. Unable to reach consensus, one of the older brothers stopped coming to board meetings, while the other hired a lawyer to closely review the books.

Ultimately, nothing came of the objections. The family continues to grumble about the lack of leadership on the board, and several have wondered out loud if it is time to take their own portion of the portfolio elsewhere.

Why are family tensions increasing?

In the above example (and in other “empty structure” situations), governance becomes obligatory: the family continues to go through the motions, acting “as if” occupying the governance roles and holding meetings equates to having a collective, energized purpose as owners. But the structures do not reflect the needs and priorities of the current generation of owners. And often no one is willing to say this.

Even worse, the governance structures are perceived as politicized, controlled by an individual, a generation, or a branch. So family owners don’t trust the structures and subsequently don’t use them for the most important functions: cross-generational and cross-branch communication. Tensions mount because the most important conversations are not happening.

What is missing?

When we see this situation in our practice, we ask: what purpose is served by the governance processes? What were these structures and practices set up to achieve? In many cases, we can look back to an earlier time and see that governance was designed to serve a purpose defined by the prior generation. In the example above (and in many other family businesses), the “real” purpose of governance (meaning, the underlying emotional purpose) is to reassure the patriarch that the family will stay together.

The problem is, when a family owner group gets larger and more diverse, the purpose of governance -– and of collective ownership -– is defined quite differently by each family owner. At this stage, no one person has the patriarchal authority to say what the purpose is, and if someone tries, others see these statements as political, serving the generational or branch interests of the speaker. What we see, of course, is that family dynamics influence how purpose is expressed and taken up. In the face of a generational transition, purpose (and in turn, governance) needs to be redefined and so re-energized.

Let’s be clear: these families often retain a sense of connectedness even if they feel alienated from the governance structures that are supposed to facilitate their collective ownership of the business. The spark is still there. They may enjoy each other’s company. They may feel loyal to the business, to the employees and executives, and to the customers. They almost always revere the family business history and legacy.

But these feelings rarely generate an electrical field strong enough to align the family’s diverse interests. What they have lost is the compelling reason to exercise the discipline of governance when that discipline might create conflict. They wonder if doing what’s best for the “whole” (the business, the family) will be what’s best for themselves and their families. They certainly don’t have the confidence that the structures are strong enough to survive a direct expression of the different interests within the owner group. As a result, without parental referees, many family groups disengage to get along.

How can these families re-energize governance?

Usually, where there are empty structures, no one has asked the current owner group: “what is your purpose?” Tweaking or overhauling governance should come only after the owner group has engaged in a process to answer this question. These groups often become energized, find their spark, and begin the process to redefine their purpose – if they are able to accomplish three major tasks:

• First, find the genuine connections among family members and build from there.
• Second, discuss together what they are proud of in the legacy and agree on what they want their children to learn.
• Third, commit together to something larger than individual interests, something that connects them to the family business legacy but goes beyond. These commitments usually include some shared community and/or charitable causes.

Only after they have made the commitment to these discussions can family owners re-articulate their purpose, figure out where the circuits are “broken,” and begin a process to make governance work for them.

Conclusion and food for thought.

Even excellent governance practices do not ensure that family enterprises will function well. Lack of psychological ownership and engagement with governance often creep into systems when they get larger. In fact, empty structures might be a natural development within family business systems if collective interests aren’t revisited, purpose is not redefined, and governance does not evolve with each new generation. As trusted advisors, it is incumbent on us to spot these empty structures as they develop, to spark the client conversations necessary to define their collective purpose, and to help them re-energize their governance structures and practices.

Based on a presentation given at the October 2016 Global Séjour in Munich.

About the contributors

Nick Di Loreto is a senior advisor at BanyanGlobal in Boston. He has counseled client families in North America, Asia, Europe, and the Middle East on governance and business strategy issues. This includes helping families to review portfolio strategies, develop organizational capabilities, and plan for generational transitions. He can be reached at [email protected].

 

 

Marion McCollom Hampton, FFI Fellow, is a co-founder and senior partner at BanyanGlobal. She has been active in the family business field for 25 years, is a former FFI board member and the recipient of the 2013 Richard Beckhard Practice Award. She is co-author of a foundational work in the family business field, Generation to Generation: Life Cycles of the Family Business (with Kelin Gersick, John Davis, and Ivan Lansberg, Harvard Business School Press, 1997). She can be reached at [email protected].